Google has grown from a 1998 start-up to become one of the biggest companies in the world, straddling multiple lucrative business lines.
They include the leading internet search engine, online video platform YouTube, cloud computing services, smartphones and artificial intelligence (AI) development.
Its stock market listed parent company Alphabet is worth more than $2 trillion as of late 2024, with vast digital advertising revenues the bedrock of its profitability.
Investing in Alphabet shares is a one-stop shop for tapping into much of the technology landscape so it’s an attractive prospect but, as with all investments, there are risks involved.
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This article covers:
How does Google make money?
Google’s parent company Alphabet makes a large proportion of its money by selling targeted advertisements to run alongside its search engine results and YouTube videos.
It also makes a considerable sum from cloud computing. These include its widely used gmail service, and Google Cloud Platform which offers a plethora of data crunching, storage and machine-learning services.
The firm is in the early stages of monetising its AI development, although this is an area much more tied to potential future revenue.
In recent years, Google has also significantly stepped up its device production. The Pixel smartphone range and Google Watch line directly compete with market leader Apple’s offerings.
How have Google (Alphabet) shares performed?
Alphabet shares have seen a stellar rise in recent years. The company was one of the big beneficiaries from the pandemic era stock market rally and, following a fall back during the period of high inflation and rising interest rates, has had a great 2024.
As of late October, Alphabet shares are trading at approximately $166. Over one year this represents a 32% rise, while over five years they are up 161%.
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What are the pros of buying Google shares?
Google’s dominant position in internet search and online advertising put it in an extremely strong position that competitors would find it hard to unseat it from. For investors this adds a measure of security and reassurance that it is more than capable of maintaining its position at the forefront of its main business lines.
Potentially more exciting for investors is Google’s place at the forefront of cloud computing and AI. These are the areas where it has most of its growth potential. As each year goes by, more data crunching and tech activity is being drawn into the cloud rather than being done on local computers.
On the AI front, Google is offering fierce competition to the likes of OpenAI. It owns cutting edge AI development firm Deepmind, and already offers a range of AI tools including its Gemini large language models (LLMs) and Imagen image creation service.
Cold, hard cash is another significant plus point. Alphabet is sitting on about $100bn in liquidity. This gives it vast scope to invest in growth of its current businesses and branch out in to new ones.
It also leaves the door wide open to generous dividend payouts to shareholders and large-scale stock buy-backs, which are two things most investors love to see.
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What are the possible cons of buying Google shares?
Google’s firm grip on the internet search market is a double-edged sword to some degree. This is because it has prompted concerns among regulators on both sides of the Atlantic that it may have too much power and market share.
One of the principal jobs for regulators of companies is to ensure they do not create monopolies and stifle competitors. Googles’ dominance of search and online advertising is therefore a concern.
In the US, the competition watchdog, the Federal Trade Commission, has opened an investigation into Alphabet over competition concerns that could theoretically lead to it being forced to sell off some parts of its business.
The company has also had run-ins with the EU and UK competitions authorities that in some cases have ended in substantial fines. Most recently, the EU fined Google €1.5bn; however Google successfully appealed against the decision.
Investigations and potential fines create uncertainty for investors and have the potential to harm the share price. Fines would need to be extremely high, though, to have a notable impact given the company’s vast resources.
A related vulnerability is the potential for rival companies to begin taking market share from Alphabet in its key areas of business. There is little sign of this yet but this is the aim of the regulators to a degree, so it cannot be ruled out.
One other thing to keep in mind is that online advertising revenues can be volatile, even for the market leader. They are closely tied to the performance of the US and global economy and consumer confidence. Any signs of a fall in online advertisement sales could send Alphabet’s share price down.
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A stock analyst’s view
Morningstar equity analyst Malik Ahmed Khan provided the following assessment of the regulatory issues Google is facing in a recent research note:
“We are maintaining our $209 fair value estimate for wide-moat Alphabet after the Capital Markets Authority, or CMA, the antitrust regulator in the UK, provisionally found that Google used anticompetitive practices in the ad-tech space.
“The allegations that the CMA has made against Google’s monopolistic behaviour in the ad-tech space are quite similar to those made by the Federal Trade Commission in its ongoing ad-tech monopoly case against Google that also alleges the firm has engaged in monopolistic behaviour in the ad-tech market.
“We previously noted that while the antitrust challenges are plentiful for Alphabet, we think investor concerns around the potential damage to Alphabet’s business due to these antitrust cases are overblown. To that end, we reiterate two key points related to not only the ad-tech antitrust case but also the Google Play and Google Search antitrust cases against Alphabet.
“One, it is important to keep timelines in mind when thinking about antitrust enforcement. For example, the CMA’s own timeline for its ad-tech investigation suggests that it could take more than a year for Google to articulate its objections to the CMA case against it before the CMA makes a final decision on the matter.
“Similarly, we don’t expect the Google Search antitrust case to result in meaningful penalties/remedies for at least another couple of years, giving Alphabet plenty of time to take remedial actions while also diversifying into other business areas such as YouTube and Google Cloud Platform.”
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How to buy Google shares
Buying shares in Google’s parent company Alphabet is straightforward once you have an account with an online investment platform.
Shares in US-listed companies are available on UK investment platforms. Declaration forms to confirm you are not a US taxpayer may be required, but only the first time you buy. While Alphabet is the name of the listing, the ticker attached to the shares is actually GOOGL (without the e).
US shares can be held in an Isa tax-free wrapper or a Sipp in the same way as UK shares. One thing to keep in mind is that they will be priced in US dollars, although platforms will also show you the sterling value in many cases.
Thematic ETFs are another option. Products which target investing themes such as cloud computing, digital commerce and AI may have significant exposure to Alphabet. You will need to identify the underlying holdings in the ETF to establish this before investing.
A third option is to buy into an actively-managed equities fund or investment trust which holds Alphabet. The largest holdings of most funds and trusts are public, so you can find good candidates by doing some research.
As with tracker funds, this would not be equivalent to a direct investment in Alphabet but some active funds will have large holdings of shares in the company, so they could give you some exposure.
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